Inflation Volatility, Credit Constraints and Institutional Reform: Modelling Startup Formation in Uganda (2001–2023)

Abstract

Entrepreneurship is widely recognised as a catalyst for economic transformation in low-income countries, particularly where formal employment systems fail to absorb rapidly growing youth populations. This study investigates how inflation, credit access, and institutional reform interact to shape startup formation in Uganda between 2001 and 2023. Using time-series econometric models-including interaction terms and structural break analysis, it finds that inflation is positively associated with necessity-driven entrepreneurship, while inflation volatility deters startup formation by exacerbating uncertainty. Credit access supports entrepreneurship only under stable macroeconomic conditions, and its impact weakens in the presence of high volatility. The analysis further reveals that Uganda’s post-2015 reforms targeting business registration, MSME (Micro small and Medium Enterprise) finance, and regulatory streamlining mark a structural shift that modestly improved startup formation. Theoretically, the paper introduces a volatility-sensitive entrepreneurship framework, showing that inflation volatility moderates the effectiveness of credit and reform efforts. Empirically, it disaggregates inflation volatility from level effects using a rolling standard deviation of CPI, an approach rarely applied in African macro-entrepreneurship studies. These insights advance access-to-finance models by demonstrating that institutional reform must be matched with macroeconomic credibility to yield sustainable entrepreneurship outcomes. The study aligns with SDGs 8 and 9, calling for synchronised strategies that combine inflation stabilisation, adaptive financial innovation, and trustworthy reform implementation to foster resilient startup ecosystems in volatile markets. In conclusion, this study provides new empirical evidence on how inflation dynamics, credit access, and institutional reform influence startup formation in Uganda. Using time-series econometric models from 2001 to 2023, it shows that while inflation pushes individuals into necessity entrepreneurship, inflation volatility undermines the enabling environment for startups.